By now it should be no secret that I am a real estate investor and that I always recommend real estate as a way for people to build wealth. There are countless reasons that real estate is a great vehicle to do this and it should be no surprise that 90% of all millionaires made their money or hold their money in real estate.
Obviously the big players in real estate are investing in large commercial shopping centers, apartment complexes consisting of thousands of units, industrial complexes and the like. This article if for people who are just starting out in their real estate investing careers.
Generally, there are two main options that people recognize when they decide to begin investing in real estate:
1) Single Family Homes
2) Residential Multifamily Properties (2-4 units)
Obviously it is not impossible for someone to buy a 30 unit apartment complex or a commercial office space as their first investment, but for the majority of us, it may be best to start a bit smaller.
My first investment property was a triplex (3 units under one roof) in Ogden, Utah. My personal preference is residential multifamily properties rather than single family homes for several reasons. I do own one single family home as an investment, but I personally recommend multi-units over single unit properties. Here are my 7 reasons why people should consider residential multifamily properties versus single family homes as investment properties.
Higher Cash Flow
Residential multifamily properties generally will have higher cash flow than single family homes. This is due to the fact that when you combine the total rents from all of the units, it will usually be higher than what the single family home next door is rented for.
Also, some of the expenses of operating the multifamily will be no more than what they would be for a single family home. For example, I pay about $600 per year for hazard insurance on my triplex in Ogden. In the single family home that currently live in, we pay about the same. My triplex in Ogden currently brings in almost $1,800 in rent, and my single family home would rent for only $1,500. As you can see, some of the operating expenses are not going to be much more than they would be for a single family residence but yet they will bring in more rental income.
Economies of Scale
When you start to build a portfolio of rental properties, it is going to make management a lot easier when all of your units are closer together. When you have multiple units in one small area versus spread out all over town, your costs will be lower in many aspects.
Consider this example. Your single family rental needs a new roof. You have a roofer come look at the property and he tells you it is going to cost $15,000 to have it replaced. At the same time, you have a fourplex that also needs a new roof. The roofer looks at the property and tells you that it is going to cost $15,000 to replace this roof as well.
When it comes to the fourplex, you are having a roof replaced for all 4 units, where as the single family home you are only having the roof replaced for 1 unit. The cost per unit to replace the roof is 75% less when replacing the roof on the fourplex versus the single family home.
This can also apply to foundations, yard/landscaping, heaters or A/C, siding, painting, or any other repairs or upgrades in which the entire property shares one building. In other words, it is much more efficient to own multifamily properties than it is to own several single family homes scattered around town.
Less Risk, More Stabilized Occupancy
When you own a single family rental property, you either have 100% occupancy (it is rented) or 0% occupancy. On the other hand, if you own a multifamily property, say a duplex (2 units), you may have 100% occupancy (both units rented), 50% occupancy (1 unit rented, 1 unit vacant), or 0% occupancy.
If you loose a tenant in your single family property, you now are generating no rental income. This can be difficult because you still have financial obligations like paying the mortgage on the property. Unless you are able to clean the property up and get it rented out right away, you may end up having to pay some of those expenses out of your own pocket.
Now, if you were to lose a tenant in the duplex, at least you still have a tenant paying you rent for the other side. This way you will still have some income coming in that can help you cover some of those financial obligations while you are working on renting out the vacant unit.
Now consider if this same thing happened to your fourplex. If one tenant left, you would still have 75% occupancy. The more units you have, the less risk is involved in losing tenants and your occupancy is generally more stabilized. This is how multifamily properties are sometimes considered to be less risky than single family homes.
Ownership is Just as Easy
Being an owner of both a single family home and multifamily properties, I can personally say that owning a multifamily property is no more work than it is owning a single family. Yes, you have more tenants, toilets and light bulbs in a multifamily property, but if you use a property management company to manage your property like I do, you don’t have to deal with these headaches.
Purchasing a residential multifamily property is no different from buying a single family. 2-4 unit properties are usually financed with the same type of residential loans that are used for single family homes. There is almost no differences in this respect.
Growing Your Portfolio Takes Less Time
Growing your real estate investment portfolio will take much less time if you focus your efforts on multifamily properties. If you are buying duplexes, you will be growing your portfolio twice as fast as if you were buying single family homes. If you are buying fourplexes, then you are growing four times as fast.
Hiring A Property Manager Makes More Financial Sense For Multifamily Properties
Most property management companies will generally charge somewhere between 8% and 10% of your gross rental income to manage a property for you. This may not always make financial sense when it comes to single family properties. Because multifamily properties generally have higher cash flow, they may have enough to cover the cost of hiring a property manager.
Eventually as your portfolio grows you will probably want to become the hands off type of landlord so that your real estate business can become more passive. For me property management is a must, and this is one of the reasons that I like multifamily residential properties.
There is Less Competition When Buying and Selling Multifamily Properties
When you are trying to buy a single family home as an investment, you are competing with other investors looking for investment properties, but you are also competing against home buyers who are looking to buy a home to live in!
However, when you are shopping for multifamily properties, you are pretty much only competing against other investors. There is far less competition in the multifamily market than there is in the single family market. This goes for both buying and selling.
Real estate investing is a great way to build up large wealth over time. Whether you plan to invest in single family properties or multifamily properties, both are great ways to get started in real estate. I have invested in both, and although single family properties can work well as investments, I prefer residential multifamily properties.